Thursday, February 26, 2015

A catastrophe of
cataclysmic proportions for Getty Images (a subsidiary of the Carlyle Group, NASDAQ: CG) is on the horizon. Below are some historical insights, and a break
down of the latest Bloomberg reports on Getty. First though, here’s a very simple comparison
that will illustrate the state of Getty’s bank accounts and loans:

If you owe so much
money to others that you can’t even afford to pay the interest accrued on the
loan, and there are no promises of large cash influxes in the near future, no
one will loan you the money to pay your monthly interest expense, let alone pay
down the principal you owe.

Simpler? ok try this:

Assume you have a $30,000 credit card debt. The interest rate is 17%,
soyou are required to pay $418.89 a
month – just in interest. In this example, using the numbers/income that apply
to Getty’s situation, you would only have $52.36 of your income you can use to
pay down your debt, thus you have NO WAY of paying off a mounting debt when
your monthly increase in debt is 8 times what you have to pay down the debt.

I
can’t make it more simple than that.

If any banker looked
at your situation above, there is no way they would loan you more money, it
would be highly irresponsible – even predatory lenders wouldn’t touch the above
situation. As such, Getty is doomed.

(Continued after the Jump)

Sources with knowledge of the situation revealed that mid-level financers
were recently asked to come to New York City by Getty to discuss additional
funding. Their take-away was that they were unimpressed.Getty, no doubt at the behest of their parent
company, the Carlysle Group, is trying to stem the blood-letting. There will be no silk purses from this sow's ear.

More and more, Getty
is not producing the content they once were, and they are relying on their
platform as a distribution of other third-party content producers, such as
Getty licensing the content from The Washington Post, The New York Times, or
Sports Illustrated.Getty does have a few pockets of staff photographers in some areas, and those photographers are constantly
producing, and in the short term, will continue to do so. And yes, Getty is
very publically present at major sporting and entertainment events (largely because they are contracted to do so by those organizations),but beyond that, their content production has
significantly diminished – they are much more curatorial than being an original
content-producer. Stories from inside Getty reveal that cost-cutting and
restrictions on spending have never been tighter.

Case in point –
Getty staff photographers used to find themselves in various “tiers” that
categorized their tenure and caliber, and as such, their salary. These tiers
have effectively been done away with for cost-saving purposes. Another example
centers around Getty staff photographers, who were able to generate additional
revenue from the content they produced by earning a percentage of the licensing
of those images. That has been reduced to a 12-month rolling window only. The next
step will be to do away with it completely.

It has been suggested
that the impending demise of Getty Images may be bad for news photographers,
and I’m not sure that that bears out in the light of day. The news isn’t going
away. News photographers should tell their stories and they can use a platform
like Newscom or Getty. One solution would be for Getty to open their platform
beyond the big players – NYT/SI – and take a nominal percentage. It seems that
if a photographer with content on their own Photoshelter archives could feed
their images through Getty and convey to Getty a 10% royalty on those
individual licensing fees, Getty could generate revenue, however these
photographers would have to opt-out of the all-you-can-use subscription models,
because the sad joke amongst all photographers who license their work within
these models is where the sales reports show the $1.51 and $0.49 licensing
fees. Frankly, Getty has been a massively negative contributory influence on news photographers and their ability to survive and thrive, and Getty has in turn licensed that content for less than it costs to produce to news outlets. One need only look at the demise of Sports Illustrated's team of photographers - Getty photographers are, more and more, filling those pages, and the magazine decided they could dump their staffers. I wouldn't say that Getty is the only reason SI made this move, but it certainly was contributory. Frankly, a reduction in news coverage by Getty either because of belt-tightening and fewer assignments, or their demise will force a re-set by those who have come to rely on Getty for images. In fact, it not only may mean a few more staff photography positions, it also certainly will mean more freelance work for individual papers, and, perhaps, even another editor or two hired to assign and manage those incoming images. What is bad for news photographers has been a situation where Getty has been able to convince someone to shoot an assignment for less than it would cost to rent the equipment and hand the equipment to a monkey. Zero value has been placed on the valuable contributions of the actual photographer. That will change once Getty is gone.

A look Back

How did Getty arrive
at this spot? Getty Images first hit the stock market during an IPO on July 2, 1996 on the NASDAQ before moving to the NYSE on November 5, 2002. Much of the public scrutiny on Getty diminished when, after a
disasterous turn in the stock market under what was then the ticker GYI, and it
seemed, for the Getty family to help defend the impending failure of a scion of
the famed Getty family, Mark Getty, one
of the many private equity funds they have a relationship with, Hellman &
Friedman, in 2008 took the company off the stock market and private, where no one had
to see the further decline, and where, according to a March 2012 article on
private equity citing Moody’s (here) notes that “certain Getty family members” were also shareholders. While the taking private of Getty was reported
as a a 2.4B transaction, H&F only “invested up to $941.3 million equity in
Getty as part of the buyout, according toSEC filings.” a pair of dividends in 2010 and 2012 effectively allowed H&F to make back
most of their investment. Enter the Carlysle Group.

In September of
2012, Moody’s reports on their review of $2.6B in debt that, according to the
Moody’s report here “The new debt instruments are being issued to fund the acquisition of the
parent of Getty Images by an affiliate of The Carlyle Group.” Moody’sgoes further, “The downgrades reflect the
increased amount of funded debt and related interest expense resulting in
higher debt-to-EBITDA leverage and weaker coverage ratios.” Carlyle bought
Getty for $3.3B in 2012.

Ok, so what is
“EBITDA” and why should you care? Well, according to Investopedia (here) that alphabet soup is a fancy way of saying “revenue minus expenses”, and the expenses is where that alphabet soup comes from. Earnings Before Interest Taxes
Depreciation and Amortization. EBITDA. Investopedia indicates (here):

"EBITDA is
essentially net income with interest, taxes, depreciation, and amortization
added back to it, and can be used to analyze and compare profitability between
companies and industries because it eliminates the effects of financing and
accounting decisions."

Now, let’s take a
look at an article by Forbes (here) where they note, “In reality, EBITDA is akin to a blender, into which go
normal financial statements and out of which comes a number that always seems
to make the subject company look better than it did when the numbers went into
said blender.” That said, if everyone is
using the same “lie” then even though it’s an erroneous yardstick, it’s the
same erroneous yardstick for everyone.

Now, coming back to
the September 2012 report, one of the really interesting things (if you like to
read the fine print, that is) is that they provide the rationale behind their
actions, and in this case, they are explaining why they downgraded the Getty
debt. But let me reiterate one point from above – about GETTY debt - “The new debt instruments are being issued to fund the acquisition of
the parent of Getty Images by an affiliate of The Carlyle Group.” Does that
make sense? Carlyle is using loans they are getting to buy Getty, and then
making Getty responsible for paying the loan back.

It’s perfectly
normal to loan someone more money than they earn in a year. A person who earns
$40,000 a year can have no more than 28% of their gross income each month
usable for their mortgage. That means a house payment of no more than $933 on a
maximum home price of $184,204. (more
here ) and (here). The assumption is that that person
will continue to earn that much, if not more, and remain employed. When a
company is in an environment when their product sales figures are on the
decline, that becomes a problem.

In Getty’s instance,
in 2012, Moody’s noted a 6.7 debt to EBITDA ratio, in an environment where a 3
is reasonable. Moody’s cites “revenue is expected to be flat in FY2012 compared
to the prior year…Muted revenue growth for continuing operations reflects the decline in
traditional premium stills business being offset largely by growth in the
midstock business…”

A year later, in
September of 2013 Moody’s was back, warning Getty of an impending downgrade on
the value of their debt. They note here citing “weak performance within the midstock imagery segment” and a bump up
from 6.7 to 7.1 in their ratio, and they began taking a serious look at “..Getty
Images' operations, particularly our view of management's ability to stabilize
revenue and cash flow in the midstock imagery segment despite economic weakness
in Europe and heightened competition.”

In December 2014, Three
months ago, 15 months after the last report, Getty in fact, gets downgraded
from stable to negative (see here) where they become what’s called “B3” on $2.5B of debt. What does that mean?
“B” is defined as “Obligations rated B are considered speculative and are
subject to high credit risk” but it gets worse. Moody’s notes “Moody’s appends
numerical modifiers 1, 2, and 3 to each generic rating classification from Aa
through Caa. The modifier 1 indicates that the obligation ranks in the higher
end of its generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates a ranking in the lower end of that
generic rating category.” So, they are
already inthe “junk” category. Their
rationale refers to “reduced free cash flow-to-debt” into about 2017.They again refer to “persistent revenue
declines in the Midstock segment since the second half of 2012 compounded by
increased operating expenses from stepped up investments in personnel,
marketing, and technology largely aimed at positioning the Midstock segment to
be more competitive. The operating performance of Getty Images is well below
its plan presented in the October 2012 buyout which underestimated the impact
of aggressive competition in Midstock.” Yet, the market doesn’t seem to be the
problem, it seems to be Getty that is the problem, when they note “to the track
record of competitors, including Shutterstock (publicly traded) and Fotolia, to
grow their stock photo revenue by high double digit percentages.” They report
that “Management confirms that excess cash will be used primarily to reduce
debt balances with acquisitions being put on hold.” (Below is a breakdown of the various ratings nomenclatures from Moody's. More on Moody’s “ratings” system here ).

The above explains
why the mid-level financiers who recently paid Getty a visit were unimpressed.
They saw the writing on the wall.

Present Day

In the last few
days, a flurry of discussion has centered around A Bloomberg News report, Getty
Images Is Running Tight on Cash (here) and a follow up, Getty Images’ Outlook Blurs as Photo Rivalry Triggers Price
War ( here ) which lead to revelations about the dire circumstances at Getty. Let’s take a
closer look at what was reported.

While Moody’s dire
reporting was coming out, Getty was finishing 2014 “burned through a third of
its cash in the last three months of 2014 as declining earnings limit the
Carlyle Group LP-controlled photo archiver’s ability to invest and curb its
access to credit…” and as a result, they only have $27 million left. Their
February 23rd disclosure, according to Bloomberg shows a further
decline of 7% for EBITDA, making things even worse.

Under the terms
oftheir previous loans, because their
EBITDA is greater than 6 (remember, it’s 8, and normal companies are around a
3) they can’t even get a loan.Further,
as Bloomberg reports, they do have a $150 million credit line, but can only take
$30 million of it because they are already over-extended.If they accessed more, they would be in
violation of their other loan contracts.

Looking back for a
moment, In the 2012 Moody’s report, they noted “…barriers to entry are lower
for the price sensitive segments. Increased demand for the company's lower
priced imagery products historically offset weakness in the traditional
segment; however, there are risks related to the potential for increased
competition, especially in the lower end stock imagery segment.” Moody’s went
on to provide what was a harbinger of things to come, when they noted “…our
expectation that demand for Getty Images' lower priced imagery products and for
its new services will largely offset mature demand for the company's premium
imagery business.”

Getty now either has
wholey-owned content of images they represent of approximately 170,000,000
images. Sources with knowledge of how valuators determined the value of that
library-as-an-asset, each image is valued at $0.15 per image. That means the
total valuation of their image library, were it to be sold off now, is
$25,500,000 (that’s 25.5 million). How
many of those are they relying on in the mid-stock segment? According to Getty,
they have just 8 million images that are unique. That means the unique value of
their mid-stock image library is just $1.2 million. Even if the figures are much higher, the reality is that blood is in the water as
Getty competitors, with no debt seek to topple Getty that is bleeding out. Both
Shutterstock and Fotolia are leading competitors in that arena, and a price
war, according to Bloomberg, is now underway. In an era where Getty must
increase revenue, the concept of “selling for less and making it up on volume…”
is just not going to work.

It did not help that
last year Getty made tens of millions of their images available for free online
(reported here - Monetizing Getty's 35M Image Archive via FREE Editorial Uses, (here) but the idea was to forgo what was just a few cents to a dollar in exchange
for what was to be a critical mass of images providing viewer tracking data
that Getty could then leverage to marketers and advertisers and be able to project
revenues into the future. That didn’t work out so well.

The Bloomberg
article closes with a very foreboding message, noting a Moody’s analyst who
states that Getty has “two competitors who are relatively debt free who can
invest”, and warns “If things don’t improve, there’s potential we’d lower the
rating.”

Here’s a hint – they
won’t improve.

The Future

Getty has made it
clear in disclosures to Moody’s that they are not going to be acquiring other
companies. Even if they wanted to, they don’t have any assets to do so. There
is a strong distaste amongst contributors about the constant decline in the
contributors’ share of licensing revenues, so a short-term shift further of
even worse percentages would create a long term problem from which Getty would
never recover.

Getty could utilize their platform that is already ingrained into the desktops and web-browser bookmarks of publishing entities around the world, and serve as a content platform only. Yet, companies like HBO, which started as a re-seller of movies moved successfully into producing content, and more recently, Netflix did the same thing, again, producing content. Getty is clearly moving away from that model.

Getty has a number
of properties within the corporate umbrella that could be salable assets. They license video, audio/music,
and microstock sites iStockphoto and Thinkstock. They also have valuable
contracts with a number of sports leagues that could be sold to competitors.
One contract that first started with WireImage was the NFL contract, which was
largely the reason that Getty acquired WireImage) which now is in the hands of
the Associated Press after a 2009 vap-getty-cred-300x179.pngendor change. Contracts with the NBA, NHL,
and MLB all could be picked up by AP, Reuters, Corbis, or another provider. MLB
extended their contract with Getty in September of 2013. Getty also has
intellectual property of PicScout – the largest commercial image-recognition
platform for locating and identifying unauthorized uses of photographs.It was acquired in 2011 by Getty and remains
operational as a separate entity under the Getty umbrella.

Each of these
sub-entities could be spun-off or sold-off in a breakup of Getty. Under a
bankruptcy scenario, these assets would all be sold off, but with no clear
entities strongly interested in the assets, they would be for pennies on the
dollar. The limited Getty staff photographers would be looking at the other
wire-services for employment, because most if not all of them are highly
talented. As for images, at 15-cents an image, those 8 million unique images
would, as noted before, be valued at just a $1M or so. Where they will get
anywhere close to the $2B+ they owe will be an exercise that involves a lot of smoke,
mirrors, and a dance I’ve never seen before.

------------RELATED - Getty Stories on Photo Business News to Present:

4
comments:

I worked at Getty producing content (imagery) for 11 years as a mid-level manager. Each time the company went through a financing overhaul (going public, moving from NASDAQ to NYSE, "converting" shares, selling to Carlisle, to H&F, all the while acquiring as many content-producing companies they could get their hands on), the "real story" eventually filtered down to employees. The real story was that the company was no longer being operated to generate profit through operating margin, but rather through a repeated sequence of leveraging deals in which the Board of Directors & Executive Committee would all be handsomely compensated each time, absolved from future responsibility for market risk, and allowed to retain their executive positions and salaries. It seemed like a series of hat tricks, with fixes in the game to protect these million- and billionaires' assets & income. Then, as now, it was incredible to contemplate that such shenanigans were legal, and was proof positive that corporate governance has little to do with running a business to make money, and is much more about shifting money around the table, and between tables, and taking a small percentage for yourself (the ExCom) as a kind of "commission", along the way. After all, Jonathan Klein and all the other senior executives at Getty were all bankers, by training and trade, before Getty (and most of them knew each other at Oxford & Cambridge, England). A senior VP once remarked to me, in 2007: "I've finally figured out why this company runs itself the way it does, compared with other media giants. The people who run Getty are not photography professionals, they're not marketing or advertising professionals, they're not publishing/editorial (media) professionals. They are bankers."